The Economic Hades of Cerberus

Who is Cerberus? What is a Cerberus?

Cerberus: The three headed dog, who in Greek and Roman mythology guarded the gates of Hades to ensure that those who entered could never leave.

H.M.S. Cerberus: The British frigate which transported three British generals to America during the Revolutionary War. The three, Johnny Burgoyne, Henry Clinton, and William Howe, were losers.

Cerberus Capital Management, L.P., an American private equity investment company which has led three corporations into the financial abyss: Chrysler, GMAC, and Mervyns.

One of the major ways companies like Cerberus prospered was to buy up other companies, strip assets from them to recover their cash investment, cut costs to maximize cash flow in the short term, and then flip them.

Mervyns was a discount clothing retailer similar to Kohls. It had been owned for decades by Dayton Hudson Corp. which used it as a cash cow to finance the growth of another major subsidiary, Target Stores.

Mervyns was sold to Cerberus and two other hedge funds in 2004. They split Mervyns into two pieces. They spun off the real estate to themselves, and then charged high rents to Mervyns. In addition they stuck Mervyns with $800 million in debt, of which $400 million was paid to the three. Mervyns lacked sufficient capital to survive the economic downturn a year ago and declared Chapter 7. It closed its doors after Christmas in 2008. Cerberus earned a profit on the deals and got out before the economic maelstrom struck, but tens of thousands of employees lost their jobs.

Cerberus acquired 51% of GMAC in 2006 for $7.4 billion. The primary purpose of GMAC had been to maximize the sales of new GM cars and trucks. As of 2006 its primary function was to maximize profits and minimize risk rather than promoting the sale of GM vehicles. Cerberus substantially raised the credit standards for GMAC loans, essentially cutting off the financing of GM cars. GMAC, along with the Cerberus owned Chrysler Finance Company, stopped financing the lease of cars and trucks.

GM was unable to sell new cars and trucks. GM had survived previous economic downturns through aggressive financing through GMAC. Not in 2008, costing it hundreds of thousands of new car sales.

One of the major investors in Cerberus was the celebrated financier, Ezra Merkin, who was named Chairman of the Board of GMAC when Cerberus acquired control. Ezra presided over GMAC’s economic collapse until he was booted out. He wasn’t terminated though because of incompetence, but rather because his financial genius was based on being a major feeder for Bernard Madoff.

GM entered bankruptcy. GMAC avoided bankruptcy, but only because taxpayers poured billions of dollars into it.

Cerberus acquired 80% of Chrysler from Daimler Chrysler in 2007.

Cerberus split Chrysler into three parts. It separately bought the Chrysler headquarters building in Auburn Hills, Michigan. Only the Pentagon is a larger office building than the 5.3 million square foot Auburn Hills complex, built at a cost of $1.6 billion. Cerberus mortgaged the building to pull cash out of the investment, and then stuck Chrysler with the mortgage payments.

Cerberus named Robert Nardelli, a consummate bean counter who had been fired by Home Depot, as CEO of Chrysler. Nardelli did his job well, all too well. He ruthlessly cut costs and product lines, laying off scores of Chrysler employees, and freezing all product development past two years. In short, Cerberus was preparing Chrysler to flip, but came up short. Chrysler had no future as an independent auto company since it lacked product.

Cerberus also pulled Chrysler Finance Company out of Chrysler in the transaction, viewing the finance arm of Chrysler as a profitable unit for Cerberus’ benefit.

Having raided the Chrysler piggy bank, Cerberus then refused to invest additional funds into it as it ran out of cash. Taxpayers have invested billions into Chrysler and GMAC.

Cerberus has refused since December to let investors withdraw their investments in the company. Merry Christmas! Much to the dismay, and seemingly surprise of a company which lost billions of investors funds in Chrysler and GMAC, 70% of the investors want out – not exactly a ringing endorsement for management.

Just like the mythical Cerberus, today’s investors can enter but not leave the economic Hades of Cerberus.